NetSuite CEO Zach Nelson has joined his former Oracle colleague and on demand software adherent, salesforce.com Marc Benioff, in predicting the failure of SAP to penetrate the SMB market. In his note to company staff (see below), Nelson boasts, "If they are lucky, it will take SAP at least 8 years, and by then the game will be over and we will be the SAP of the mid-market."

"It will take them 8 years to create a product that has the ERP functionality that we have today. Of course, they can come out with a product this year that has some functionality, but not the depth of functionality that we provide today and that real mid-market companies need, " Nelson told me. "You can't compress time by throwing millions of developers at it." NetSuite has 70 developers, many who have been working on the product for nearly 9 years, he added.

He believes that "we are watching the evolution from Stone Age solutions like SAP, Microsoft and Intuit to the Internet Age solution of NetSuite at an even faster pace than we could have anticipated."

There is some validity in his point about Stone Age applications from the established vendors. So far, none of them have been particularly successful in shifting their products and business model into the on demand space.

Nelson said he was inspired to write the note by a David Berlind post about software incompatibilities, such as Intuit's Quickbooks application, with Vista. "It's the nail in the coffin of the traditional software model. Look at Intuit, one of Microsoft's largest ISVs. They can't get their product ready for Vista," Nelson said. "When the largest ISVs can't get products ready, how can customers expect to manage and upgrade their software." SAP and other vendors who formerly dissed the on demand model, now can't run fast enough to put out the next press release. He also said that Intuit is afraid to commit to an on demand model for fear of cannibalizing its current business. "The company effectively neutered Quickbooks on line," he claimed.

It is not without notice that Nelson is prepping NetSuite for an IPO this year, and throwing sand in SAP's face will get some attention. He wouldn't comment on the IPO, but said that in 2006 NetSuite did about $70 million in revenue, 80 percent year over year growth, and has 7,000 customers and 75,000 subscribers to its services. For comparison, SAP did $8.6 billion in revenue for 2006.

I asked him why NetSuite, which has been in existence 8 years, about the same length of time as Benioff's company, is so much smaller than salesforce.com

"They chose entirely different application to sell. Point products [like CRM] take off faster, are a much greener field the ERP applications. It takes a longer time for ERP solutions, but they are much stickier," Nelson said. "Look at SAP compared to Siebel ramp. SAP has a slower ramp but it's a stickier application. When a customer buys NetSuite, they are replacing several applications. It's a far more complicated sale than selling a forecasting system."

Nelson said the NetSuite had its first SAP replacement sale last quarter, gaining 75 users. William Wohl, vice president of communications at SAP responded to Nelson's missive as if swatting an irritating fly:

While niche players get credit for starting a new market segment, those that watch the software space have always cautioned that the niche players would be face enormous challenges once companies like SAP moved into that space. You can look at any area of SAP's business history and see how our move into a space not only innovated the market, but quickly achieved leadership. Today, SAP is already the leading provider of business software to mid-sized companies (nearly 65 percent of our customer base is mid-market today), and our solutions meet the needs of mid sized companies in nearly every industry -- including the way that partners deliver All in One to hundreds of so-called micro vertical industry slices. Even those that didn't believe SAP could deliver to the small business segment are shocked at how quickly we reached 10,000 customers for Business One. This week we announced our intentions. Later this year, we'll show the product -- its a bit early to criticize us before the product has been unveiled. Our track record in entering markets demonstrates that we bring not only innovation (like a hybrid model for on-demand CRM, because that's what customers want and need) but a clear record of success.

Wohl offered some numbers, such as 8,850 mySAP All-in-One customers (25 percent year-over year-growth) and 11,400 SAP Business One customers worldwide at the end of Q3 2006, and about 550 micro-vertical solutions for mySAP All-in-One globally and 300 add-ons for SAP Business One. It's also clear that on demand software companies are nibbling at the ankles of SAP, as well as Oracle, Microsoft and others, and drawing blood.

NetSuite will need to run very fast to keep SAP off its tail, especially as it becomes a public company, with all its numbers revealed. SAP may be known as slower, more costly and complex, but that doesn't mean the company can't use if money and long tentacles to muscle its way into the market. Of course, an easy way to muscle into the market would be to acquire NetSuite, but that doesn't seem to be in the SAP strategic plan.

Yesterday during its disappointing earnings call, SAP fired a shot across NetSuite’s bow and pledged that future growth would come from its mid-market initiatives. To date, those efforts have been based on a product called SAP All-in-One, an on-premise version of SAP’s R/3 enterprise product. Not surprisingly, this has not been a particularly successful effort, given that it takes the world’s largest corporations millions of dollars and multiple years to get R/3 up and running. SAP has also spent millions this year targeting smaller companies with TV ads, and if truth in advertising laws were enforced they would have to change their marketing slogan for All-in-One to “The world’s most complex and expensive software, now for mid-sized companies!”

For years, SAP scoffed at the idea that customers would embrace an on-demand model for their core financial/ERP operations. Most recently, an IDG News article indicated SAP’s President, Product and Technology Group Shai Agassi argued that “…companies, even smaller ones, will never be willing to trust their core operational processes to an outsourced provider.” I guess he missed that fact that NetSuite became the fastest growing company in North America delivering on-demand software that does exactly that for thousands of customers worldwide.

Now, it looks like even SAP has gotten on-demand religion. The question is, what is it that they are doing? SAP didn’t provide much detail on their “new” strategy, called A1S (a name almost as catchy as R/3), but on the product side here’s what they could be up to:

* A hosted version of All-In-One -- that’s great news for NetSuite because the only way to make All-in-One more expensive is to have SAP host it for you. All-in-One lacks the capabilities that make NetSuite so attractive as a mid-market solution – deep functionality combined with a multi-tenant architecture where customizations migrate. We upgraded NetSuite 460 times last year and didn’t lose a single customization. Companies using any SAP product rue the day they have to install a patch -- much less upgrade hundreds of times – for fear of losing customizations and functionality.

* A brand new code base -- also great news for NetSuite because they will be years behind us. It took NetSuite 8 years to build the world’s only on-demand ERP/CRM business application. If they are lucky, it will take SAP at least 8 years, and by then the game will be over and we will be the SAP of the mid-market.

Larry Ellison once told me that the best thing that happened to Oracle in the early days was IBM’s pre-announcement of a relational database years before it was available. It gave credibility to the then new idea of relational databases and created demand that IBM could not fulfill. Well team, this is our “IBM Moment.” SAP’s announcement will cause confusion within their customer base and sales organization while it creates demand for a solution that only NetSuite has. We are watching the evolution from Stone Age solutions like SAP, Microsoft and Intuit to the Internet Age solution of NetSuite at an even faster pace than we could have anticipated. It doesn’t get much better than this!